In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Südwestdeutsche Salzwerke AG's (FRA:SSH) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Südwestdeutsche Salzwerke has a P/E ratio of 29.16. In other words, at today's prices, investors are paying €29.16 for every €1 in prior year profit.
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View our latest analysis for Südwestdeutsche Salzwerke
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Südwestdeutsche Salzwerke:
P/E of 29.16 = €70 ÷ €2.4 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Südwestdeutsche Salzwerke's earnings per share fell by 3.2% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 8.5% annually. So we might expect a relatively low P/E.
Does Südwestdeutsche Salzwerke Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Südwestdeutsche Salzwerke has a higher P/E than the average company (24.4) in the food industry.
Südwestdeutsche Salzwerke's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.